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Indian Banking: Two Rulebooks, One Bank

By Chuppala Nagesh Bhushan

On paper India's debt laws apply to everyone alike. In practice, scale of debt determines which law shows up

THE letter of Indian banking law makes no distinction between a farmer and a billionaire. Its application is another matter. A close look at how defaults are actually handled—by whom, how fast, and on what terms—reveals two parallel systems operating inside the same institutions, distinguished chiefly by the size of the debt involved.

Enforcement, calibrated by class

Miss one or two instalments on a car or home loan, and an ordinary borrower meets the sharp end of the system quickly. Recovery agents call repeatedly, often abusively; relatives are drawn in; vehicles and property are seized and auctioned with little delay. In the worst documented instances, farmers have had tractors seized or, in a handful of cases, run over during repossession.

Corporate defaulters owing thousands of crores meet something gentler: polite, high-level negotiation. Rather than an immediate auction of assets, they are offered the more forgiving vocabulary of corporate finance—restructuring, insolvency proceedings, resettlement—terms unavailable to a family behind on a two-wheeler loan.



Absolute recovery versus the "haircut"

For ordinary borrowers, recovery is treated as non-negotiable. Banks do not restructure EMIs, school fees or household budgets even when a family's earning member dies or income disappears entirely.

Large defaulters are offered "haircuts"—the industry euphemism for the portion of a debt a lender formally accepts it will never recover. In prominent cases the haircut has approached the entire debt: a settlement plan cleared for the businessman Subhash Chandra required him to pay just ₹65m against a personal-guarantee claim of ₹220bn, a 99.97% write-down, or three paise recovered on every 100 rupees owed. Comparable haircuts, exceeding 99%, have been approved in the resolution of debts linked to the Anil Ambani group.

A committee that can be out-voted by its own debtor

For a household default, resolution is swift and one-sided: a single hearing, and the property is attached. Corporate insolvency under India's Insolvency and Bankruptcy Code (IBC) runs on a different logic. A settlement requires the assent of 75% of a Committee of Creditors (CoC) by voting share—a threshold that has proved exploitable through interconnected, family-linked entities acting as ostensibly independent creditors. In the Chandra case, five such connected entities controlled just over 61% of the voting share, sufficient to overrule genuine public-sector and private lenders—HDFC Bank, Canara Bank and LIC Housing Finance among them—and approve a settlement squarely in the debtor's favour. The effect is a debtor sitting, in practice, in judgment of his own case.

Scrutiny, unevenly applied

The ordinary citizen is tracked exhaustively: PAN, Aadhaar, bank records and personal history are demanded for even modest transactions. Mega-defaulters have often escaped comparable scrutiny. In Chandra's case, the resolution professional accepted his declaration of financial distress without ordering a forensic audit—despite his having sold a Lutyens' Delhi bungalow for ₹12.6bn shortly beforehand.

One credit score, two consequences

A single dip in an individual's CIBIL score can lock a borrower out of the credit market for years. Promoters who default on debts worth thousands of crores are frequently able to secure fresh bank financing to launch entirely new ventures soon after.

What the recovery data show

The disparity is not anecdotal; it shows up cleanly in the numbers. Central Bank of India data indicate that banks recover 74% of retail defaults under ₹10m. For mega-defaults above ₹1bn, the recovery rate collapses to 14.5%, with the remainder—running into tens of thousands of crores—written off. Even as these write-offs accumulate, banks have extracted more than ₹280bn in penalties over five years from account-holders, disproportionately poor and middle-class, who failed to maintain minimum balances.

The pattern beneath the numbers

None of these six divergences—enforcement, recovery terms, committee governance, scrutiny, credit consequences, or aggregate recovery rates—is an isolated quirk of one case. Together they describe a single, consistent rule: the law's bite is inversely proportional to the size of what is owed. A framework nominally blind to the identity of the borrower turns out, in its daily operation, to see debt scale very clearly indeed—and to treat it as the decisive fact.



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